Merchants moved on Oct. 19 for preliminary approval of a class action settlement with Visa, MasterCard and a large number of banks that the proposed class alleges fixed the prices of interchange fees paid by merchants when customers use Visa and MasterCard credit cards, for $ 6.05 billion, an eight-month reduction in interchange fees worth $ 1.2 billion and modifications of the Visa and MasterCard rules (In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation [All Cases], No. 05-MD-1720, E.D. N.Y.).
The merchants contend that the settlement would be “the largest private damage recovery in United States antitrust history” and would “continue a series of reforms that restructure the payment card industry, making it more competitive.” Several proposed class representatives oppose the settlement, and, pursuant to an earlier ruling by U.S. Magistrate Judge James Orenstein of the Eastern District of New York, objections to preliminary approval of the proposed settlement must be submitted within 30 days after the filing of the motion for preliminary approval.

Terms Of Settlement

Pursuant to the agreement filed in the U.S. District Court for the Eastern District of New York, Visa Inc., Visa U.S.A Inc. and Visa International Service Association (collectively, Visa) will pay two-thirds of the cash settlement amount, approximately $ 4 billion, and (MasterCard Inc. and MasterCard International Inc. (collectively, MasterCard) and the banks will pay approximately $ 2 billion. The banks are issuing banks – banks that issue MasterCard-branded payment cards to customers – and acquiring banks – banks that acquire payment transactions from merchants and act as a liaison between the merchant and the issuing banks.

The settlement agreement also permits the merchants to impose a surcharge on credit card purchases, subject to a cap and a clear disclosure of the surcharging practices.

In addition, the “settlement locks in the $ 10 minimum for credit card transactions enacted by Congress through the Durbin Amendment even if Congress repeals that part of the legislation” and “locks in the reforms imposed by the Final Judgment in the Department of Justice lawsuit against Visa and MasterCard even if those reforms are terminated,” the merchants say.

The litigation began in 2005, when putative class actions were brought by merchants against the defendants. The merchants asserted that because the board of directors of MasterCard and Visa set the interchange fees the issuing banks paid the acquiring banks and the banks controlled the board of directors, the banks dictated the amount charged as interchange fees.

VISA and MasterCard announced their initial public offerings (IPOs), wherein they redeemed and reclassified the stock held by theirs member banks and then transferred new shares to the banks.

The merchants then argued that the agreements leading up to the IPOs violated federal antitrust law and state fraudulent conveyance law. The merchants asserted that the purported transformations from joint ventures to “single entities” would insulate internal actions from antitrust laws.

The merchants alleged that the defendants adopted interchange rules and rates, other network rules and corporate reorganizations that constituted unlawful price fixing, unreasonable restraints of trade, monopolization, lessening of competition, and fraudulent conveyances, in violation of the Sherman Act, the Clayton Act, California’s Cartwright Act and the New York Uniform Fraudulent Conveyance Act.

The settlement was reached while both the class plaintiffs’ and the defendants’ motions for summary judgment were pending. The settlement is subject to approval by Judge John Gleeson.

The Federal Rule of Civil Procedure 23(b)(2) and 23(b)(3) classes are defined as merchants “that have accepted Visa-Branded Cards and/or MasterCard-Branded Cards in the United States at any time from January 1, 2004 to the Settlement Preliminary Approval Date.”